Why You Need An Emergency Fund

You WILL encounter a financial emergency in your life.  All of us do.  It’s not a matter of “if”, but “when”.  As adults, we know that life happens all of the time and sets us back a few bucks, but why is it that most of us don’t prepare for these life-altering events by not having an appropriate emergency fund?  What about you?  Do you have an emergency fund in place?  What would you do if something happened and you had to come up with $5k or $10k fairly quickly?  Would you borrow the money from a friend or family member, put it on a credit card, take out a 2nd mortgage, cash out investments?  All of these options are common, but very unwise.  Notice the pattern of borrowing money or using debt.  What if debt wasn’t an option?  How could you pay for your bills?  Don’t worry, we will talk about a few ways to stash some quick cash in another post, but in this post, we’ll talk about the emergency fund and it’s importance.

What I’ve found in my financial coaching is most people have the best intentions of saving money for emergencies but a few things get in the way.  1) Instant Gratification: There are so many things we want to buy, so we tend to use all of our cash for those items rather than saving for emergencies first, then using extra cash to buy the things we want.  2)  A bad definition of an “Emergency”: This is a big one, and related to the first one.  We work hard and save money, then something comes along that we want so we take out cash to buy that item, but don’t really ask ourselves the question; “Is this REALLY an emergency?”.  Then, we look up and have no money left. Hint: a couch, new TV, vacation, or car isn’t an emergency.  3) We don’t replace the funds used: Some of us have our emergency funds in place, but when a real emergency comes along and we pay for it, we don’t have the discipline to replace the money used so our emergency fund gets depleted. 4) Lack of Planning: Then there are some of us who save for emergencies, then one comes along and then another and another and another.  Meanwhile, we aren’t planning carefully enough to save more toward that fund to give us the cushion we need.  I’ll be the first to admit, sometimes more emergencies come than we can handle at the moment, but most of the time it’s just lack of planning.  If things just “keep coming up”, it’s time to look at your budget and see if you can start saving for specific things that should be budget categories rather than dipping into your emergency fund all of the time.

How much should you have in your emergency fund?  The answer depends on the likelihood that you’ll need it and for how long.  The general rule is anywhere from 3 months to a year of household expenses.  The reason for this is because most of the time, the greatest emergency other than some illness that is life-threatening is if you can’t work.  If you’ve saved multiple months of expenses, you’ll be able to keep the household running if you lose your job or can’t work for a while.  So, you’ll have to determine what is right for you depending on a few factors like: 1) How steady is your job? 2) Do you have multiple incomes in your home? 3) How large are your bills? 4) Do you have a bunch of debt payments?  All of these questions are things you should be thinking about when determining how large your emergency fund is.  The biggest takeaway is: You NEED an emergency fund so make your budget, get out of debt, and start saving money today!